Reservations Holdings (NASDAQ: BKNG) has been one of the best performers, with its share price rising from $50 in 2008 to over $2,000 in 2020, a 4,000% increase. the company is the world’s leading provider of online travel and related services. It operates primarily through six brands which include Booking.com, Priceline, Agoda, Rentalcars.com, KAYAK and OpenTable. It has a presence in over 200 countries with over 100 million active users worldwide. However, the unprecedented pandemic in 2020 crushed the company as the entire travel industry shut down due to worldwide lockdowns. With the company down 30% from its all-time high, I believe this presents a good buying opportunity for investors as the company continues to recover.
As the pandemic fades and travel restrictions ease, Booking Holdings is likely to benefit significantly from these tailwinds. It is posting strong financial results and has a fairly solid balance sheet. Recent earnings of other travel companies also show strong travel demand and spending despite the weakening economy. The company is also now trading at a historically low valuation. Therefore, I believe Booking Holdings is a buy at the current price.
Booking Holdings reported very strong earnings in May, signaling a better-than-expected recovery. The company reported revenue of $2.7 billion, up 136% year over year (year-over-year) from $1.1 billion. Agency revenue was $1.5 billion, up 102%, marketer revenue was $1.1 billion, up 182%, while advertising and other revenue was $195 million, up 282%. Bookings also saw strong growth, rising 129% year over year to $27.3 billion, the highest quarterly amount in the company’s history. Growth was primarily driven by improving room night trends (up 100% year-on-year), increased accommodation ADRs and significant growth in global flight products.
Booking Holdings also returned to profitability this quarter. Non-GAAP net income for the quarter was $161 million, compared to a non-GAAP net loss of $(215) million in the prior year quarter. Non-GAAP net income per share was $3.9, compared with a loss of $5.3 per share a year earlier. Adjusted EBITDA also went from negative $(195) million to $310 million this quarter, representing a difference of 11.5%. Operating cash flow improved significantly from negative $(207) million to $1.7 billion. Operating cash flow margin was 63%. Unlike many other travel companies that have a vulnerable balance sheet due to heavy debt load, Booking Holdings’ balance sheet is very strong. It ended the quarter with $10.1 billion in debt and $10.6 billion in cash, more than enough to cover all of its debt.
Glenn Fogel, CEO, on the first quarter results
“Despite an uncertain macroeconomic environment, we have seen continued strengthening of global travel trends so far in the second quarter of 2022, and we are preparing for a busy summer travel season ahead. I am encouraged by how well our teams are executing to capture Travel Requests in this recovery environment and our progress in expanding our payments platform on Booking.com as we build towards our vision of Connected Travel.
Profits of other companies
The latest earnings reports from travel companies are showing strong travel demand and spending as consumers are finally able to travel overseas after almost 2 years of worldwide border closures. The likes of Hilton ( HLT ), Visa ( V ) and American Airlines ( AAL ) all highlighted stronger-than-expected travel volume during their earnings. Hilton reported revenue of $2.2 billion, up 68.4% year-over-year, American Airlines reported revenue of $13.4 billion, up 80.1% year-over-year, while Visa reported cross-border volume growth of 40%. The comments from management during the win calls are also very positive and encouraging. I believe the upbeat guidance from other companies should bode well for Booking Holdings as the company reports earnings on 3/8.
Robert Isom, CEO of American Airlines, on the travel request:
Demand for leisure exceeded 2019 levels in the second quarter and customers continue to tell us their growing appetite for travel. Enrollments in our loyalty program continue at record levels and spending on our co-branded cards is growing at a faster pace than ever before.
Vasant Prabhu, CFO of VISA, on the volume of cross-border travel
The strong recovery in cross-border travel continued. The index in 2019, the volume of cross-border trips, excluding transactions within Europe, increased from 94 in March to 112 in June. This was helped by the opening of much of Asia at the start of the quarter.
After a 30% decline from its all-time high, Booking Holdings is now trading at a very compelling valuation. The current PE ratio looks expensive at 156x, but that’s because it discounted growth for the remaining quarters of this year. If we factor in EPS (earnings per share) growth, the company is actually trading at a FWD PE ratio of 19.6x, which is historically undervalued. From the chart below, you can see that since the Great Financial Crisis, the company has traded around an average PE ratio of 25x, and has almost never traded below 20x PE.
With subdued travel demand, the company is expected to continue its strong growth, which will further suppress its valuation. According to Seeking Alpha’s analyst estimate, the FWD 23′ PE ratio is projected to be 15.1x, a steep discount to its historical average. The company’s stock price is now trading at 2017 levels, but this year’s earnings are forecast to be 41.7% higher than 2017. I believe the current valuation is attractive and a change in the average PE ratio will to present a short-term growth of 25%+.
Monkey pox outbreak
Monkeypox has been one of the hottest topics of late. The viral outbreak first started in the UK earlier this year and is rapidly spreading across the globe. There are now over 22,000 cases worldwide with almost 5,000 cases in the US alone. Health officials around the world are very alarmed about this and vaccines are now on the way. I believe investors should follow this closely as it could bring significant headwinds to Booking Holdings.
Last Thursday, San Francisco and New York declared an emergency for the disease, citing a rapid increase in cases in the past month. The declaration will allow local authorities to mobilize more resources and staff to deal with the outbreak and speed up emergency planning. Currently, no emergency closures or restrictions are planned, as monkeypox is believed to be spread through very close contact. The scale and impact of this outbreak is still very small compared to COVID, but if it continues to spread quickly, lockdowns or border closures may be possible. This will shut down the travel industry again and significantly affect the company in the short term. I think the chances of that happening are unlikely, but it’s definitely a risk to watch out for.
In conclusion, I think the current decline is unwarranted and long-term investors should take advantage of this opportunity. Despite the share price being down almost 30%, Booking Holdings continues to see a strong recovery. It posted very high profits with the highest amount of bookings in the company’s history. Revenues were in triple digits with strong growth across all revenue streams and the company returned to profitability. The results of other travel companies also show that demand for travel continues to be very strong. The company is also now trading at a historically low valuation as it continues to benefit from re-opening tailwinds. The recent outbreak of monkeypox could bring unprecedented windfall for the company, but the risk of that happening is still very low at this point. I therefore rate Reservations Holdings as a buy.